We examine the relation between corporate tax planning and firm-level productivity. Using a sample of U.S.-listed firms from 1994 to 2017, we show that, ceteris paribus, lower effective tax rates lead to higher production efficiency. Consistent with the "funding gap" of innovative investments due to debt market frictions, the results indicate that productivity is more sensitive to tax planning for knowledge capital intensive firms. The findings also suggest that tax planning enables firms to increase in size, benefiting from economies of scale. To mitigate endogeneity concerns, we employ a battery of robustness tests, including a quasi-natural research design that exploits a plausibly exogenous increase in the tax planning opportunities of certain firms. Our findings enhance the understanding on the economic implications of corporate tax planning, and provide insights for informed tax policy debates.
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